Coordination with the EU

The European Semester is a yearly cycle of economic policy strengthening, coordination and monitoring. Each year the European Commission (hereinafter – the Commission) undertakes a detailed analysis of EU Member States’ budgetary plans, macroeconomic and structural reforms and provides them with country-specific recommendations, which later on are considered and approved by the Council and which should be implemented by the Member States within the next 12-18 months. These recommendations also contribute to the objectives of the EU long-term strategy – job creation and economic growth, implementation of the "Europe 2020" strategy, and monitoring of their implementation is carried out in the context of the European Semester.

Cycle of the European Semester

The Annual Growth Survey sets out proposals for EU priorities in the coming year, including the economic and fiscal policies and reforms needed to ensure stability and growth.

The Alert Mechanism Report identifies the Member States for which further analysis is necessary in order to decide whether an imbalance in

Country Reports analyse the economic situation and policies of each EU Member State and assess whether imbalances and excessive imbalances exist in those Member States where an in-depth review was carried out.

In National Reform Programmes the Member States provide information on the reforms under implementation and to be implemented and information on the measures for achieving the objectives set out in “Europe 2020” strategy.

In Stability/Convergence Programmes the Member States following the requirements established provide the up-to-date information on the budget and tax policy carried out and planned (the euro area Member States prepare Stability Programmes, non-euro area Member States – Convergence Programmes).

The Stability and Growth Pact (SGP) is a rule based framework for thecoordination of national fiscal policies in the economic and monetary union that was established to safeguard sound public finances in the Member States in 1997. The SGP consists of preventive and corrective arms.

Under the provisions of the preventive arm, the Member States must submit annual stability (euro zone) or convergence (non-euro zone countries)programmes showing how they intend to achieve or safeguard sound fiscal positions in the medium term taking into account the impending budgetary impact of aging population. After the Commission assesses these programmes, the Council gives its opinion on them. The preventive arm includes two policy instruments that can be used to prevent the excessive deficit:

the Council, on the basis of a proposal by the Commission, can address anearly warning to prevent the occurrence of an excessive deficit;

using the policy advice, the Commission can directly address policy recommendations to a Member State as regards the broad implications of its fiscal policies.

The corrective arm is related to the excessive deficit procedure (EDP). The EDP is triggered by the deficit breaching the 3% of GDP threshold of the Treaty. If it is decided that the deficit is excessive in the meaning of the Treaty, the Council issues recommendations to the Member States concerned to correct the excessive deficit and gives a time frame for doing so. Non-compliance with the recommendations triggers further steps in the procedures, including the possibility of sanctions for euro area Member States.

The Stability and Convergence Programmes that must be submitted by the Member States to the Commission and the Council before 30 of April every year contain the following information:

a medium-term objective (MTO) representing a budgetary position that safeguards against the risk of breaching the 3% of GDP threshold of the Treaty and ensures the long-term sustainability of public finances, the adjustment path towards the MTO and the expected path of the debt ratio;

the underlying economic assumptions (growth, employment, inflation and other important economic variables);

a description and assessment of policy measures to achieve the programme objectives;

an analysis of how changes in the main economic assumptions would affect the budgetary and debt position;

the medium-term monetary policy objectives and their relationship to price and exchange rate stability (for non-euro area countries only).

The Council delivers an opinion based on the assessment by the Commission with specific recommendations for the Member State concerned in which it may suggest actions to be taken to improve the economic situation.

According to the provisions of the SGP, the Ministry of Finance prepares the Stability Programmes of Lithuania for an appropriate year on an annual basis since Lithuania joined the euro zone.

Stability (Convergence) Programme is a document provided for in the Treaty establishing the EU, where the latest information of on-going and planned budgetary and tax policy is presented following the requirements laid down in the Code of Conduct of the European Commission. The Programme is constantly updated. The information presented in it has to be based on adopted legislation. The governments of the EU Member States are responsible for development and update of the convergence programmes.

The Programme surveys recent economic developments in Lithuania, presents monetary and budgetary policy plans for medium term, assesses risk factors, informs about national quality criteria for general government finances and present Lithuania’s preparation to overcome aging society consequences, also reviews structural reforms having a huge impact on government finances. It also presents the assessment of economic cycle impact on public finances.

The Treaty on Stability, Coordination and Governance (TSCG) signed by 25 EU Member States (all except for the Czech Republic and the United Kingdom) on 2 March 2012 is another EU initiative to ensure stable public finances. This intergovernmental agreement entered into force on the 1 January 2013following ratification by twelve euro-area Member States. The TSCG is only binding for all euro-area Member States, while non-euro zone Member States are allowed to choose when and to what extent they will join the Treaty. The provisions of the Treaty require the Member States to ensure the application of the following rules:

The budgetary position of the general government of a Member State shall be balanced or in surplus;

A rapid convergence towards their respective medium-term objective with a lower limit of a structural deficit of 0.5 % of GDP;

Temporary deviations from their respective medium-term objective or the adjustment path towards it may occur only in exceptional circumstances;

Where the ratio of the general government debt to GDP is significantly below 60%, the lower limit of the structural deficit can reach at most 1.0 % of GDP;

In the event of significant deviations from the medium-term objective or the adjustment path towards it, a correction mechanism shall be triggered automatically. The mechanism shall include the obligation of the country concerned to implement measures to correct the deviations over a defined period of time.

These budget rules must be implemented in national law through constitutional legal acts, and in case a country does not properly implement them, the European Court of Justice may impose financial sanction of 0.1% of GDP. The TSCG was ratified by the Parliament of the Republic of Lithuania in June 2012.